Quarterly Market Update 2Q 2014 By: Gabriel PotterMBA, AIFA® 2014.07.02

Key news stories

As expected, the lull in first quarter data was temporary.  Fundamental indicators were mixed, but mostly positive during the 2nd quarter of 2014, allowing the markets to solidify and advance.  Geopolitical risk – notably in Eastern Europe and the Middle East - seemed to climb during the quarter, but had only a very limited impact to developed market economies.  Key emerging markets showed signs of a softer landing than originally expected, bolstering their case.

Equities

The S&P 500 has now climbed a wall of worry for 6 consecutive quarters.  After last year’s stratospheric rise, most analysts expected a slower climb since bottom line improvements have to be a product of organic growth, since costs are already contained and multiples have already expanded to long term averages.  Certainly, market appreciation has been slower, but we’ve already hit year end targets for several institutions (Credit Suisse, Barclays Capital, Goldman Sachs, Deutsche Bank).

All index performance values are for the 2nd quarter of 2014.

  • US Large Cap Growth - Russell 1000 Growth:  5.13%
  • US Large Cap Value - Russell 1000 Value:  5.10%
  • US Small Cap Growth - Russell 2000 Growth:  1.72%
  • US Small Cap Value - Russell 2000 Value:  2.38%
  • Developed International Markets – MSCI EAFE:  4.09% 
  • Emerging Markets - MSCI EM:  6.60%

Bonds

After the market’s overreaction in March 2014 to new Federal Reserve Chairman Janet Yellen’s suggestion of 6-month timeline for raising rates upon the end of QE, the Fed has become much more cautious about verbalizing any policy directions.  The reversion of original expectations (i.e., a slower rise in interest rates), the long end of the duration play advanced the most during the quarter.

Again, all index performance values are for the 2nd quarter of 2014.

  • Barclays US Aggregate Bond:  2.04%
  • Bank of America/Merrill Lynch High Yield Master II:  2.57%
  • Barclays Capital US Intermediate Credit:  1.79%
  • Barclays Capital US Government:  1.34%
  • Barclays Capital US Gov’t/Credit Long Duration:  4.93%
  • Citi World Government Bond Index (non USD):  2.64%

Alternatives

Real estate continues to be a tremendous winner, with year to date returns in excess of 16%.  In a world where income is hard to come by through conventional bonds, yield hungry investors continue to trade into income heavy investments, like REITs.  Oil has climbed modestly, but other energy products (Gasoline, Natural Gas) have been essentially unchanged for the year.  Some agricultural and base metals (Corn, copper) are slightly lower while precious metals climbed.

  • Real Estate - FTSE NAREIT All REITs:  7.13%
  • Commodities – Morningstar Long Only Commodity TR:  0.78%
  • Inflation – Barclays US Treasury TIPS:   3.81%
  • Hedge Funds – Credit Suisse Hedge Fund:  0.43% (through 5/31/2014)
Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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